Can Cloud Computing Clear the Air?

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Science-fiction legend Arthur C. Clarke famously wrote that “any sufficiently advanced technology is indistinguishable from magic.” For many years that dictum had a corporate manifestation, with the IT function a seeming source of magic, officiated by a priest-class of techno-wizards who uttered arcane charms and knew far more about machines than customers.

But here comes cloud computing, promising to transform IT into something no more mysterious than electricity: flip a switch and access all the computing power and applications you need.

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The promise of cloud is that there will no longer be any need to purchase and maintain servers and applications and all the other expensive hardware and software modern businesses require. That may prompt CFOs to believe that IT departments themselves will vanish, or at least shrink to the point where the long-standing tension between chief financial officers and chief information officers will become moot.

But the reality is far more complex: if anything, cloud computing is more likely to bring CFOs and CIOs closer together, for several reasons. For starters, it will take both parties to penetrate the hype surrounding cloud computing, which has replaced “innovation” as the hot consulting concept of the moment. Despite television commercials showing happy folks solving problems by shouting, “To the Cloud!” there’s no such place. The “Cloud” simply describes a system for accessing computing capabilities at a distance via the Internet. There are several approaches (public clouds, private clouds, and hybrid models; see “Your Cloud or Mine?” July/August 2010), but none of it is magic, and most of it — despite the hype — is not new.

A Whole New Economy
The model for cloud computing is also not as simple as it is typically presented, and that’s where a closer working relationship between finance and IT becomes critical. All those cloud-accessed servers need to talk to your legacy systems, and that requires business-process mapping and integration, not to mention a whole new approach to security — all complex activities that demand IT expertise. The sooner CFOs come to terms with that, the better their relationship with their CIOs will be, because a wholesale cut-over to “cloud-based everything” is not viable, technologically or financially.

While CFOs need to understand the technical challenges of embracing new cloud options with minimal risk, they also need to lead the way in parsing the value of the underlying business model. Before the cloud, IT buying decisions hinged on unit costs: x computers or software licenses at y cost. Now the calculations involve a combination of seat licenses, bandwidth, storage volumes, and related measures of processing power and applications capabilities. That’s not an advance in technology; that’s a whole new economy.

CFOs are, understandably, enthusiastic about cloud computing for its potential to lower costs. A recent Booz Allen Hamilton report, “The Economics of Cloud Computing,” estimated that over a 13-year life cycle (3 years to prepare, 10 years of operations), the cost of “implementing and sustaining a cloud environment may be as much as two-thirds lower than maintaining a traditional, nonvirtualized IT data center.” This may be one reason why a 2010 IDG survey found that 67% of enterprises with more than 1,000 employees were planning to increase the percentage of their IT budget allocated to cloud-based computing, spending an average of $2.2 million this year.

There’s little doubt that cloud computing can return both cost and operational benefits to organizations that do it right. However, as is often the case, hype has led to irrational exuberance (see “Sounds Great! [But What Is It?]” Topline, March).

One refrain sung by the cloud-computing choir is that because it’s a pay-as-you-go proposition, it moves IT costs from capital expenditures to operating expenditures. But opinion is divided on the true value of that shift. Matt Kellerhals, Microsoft’s general manager for IT finance, believes that there is a big difference between “a capex world,” where “we would simply ask the CIO, ‘How much hardware are you going to buy?'” and an operating-expense world, in which finance does “very close planning with IT” because “if demand spikes, the CIO has to make sure that’s reflected in his financials.”

But Bruce Schuman, group controller for IT at Intel, finds the whole “opex-is-better-than-capex” argument to be a “strange” one. As far as Schuman is concerned, “It doesn’t matter if it’s capex or opex — it’s all cash to us. We try to cash-optimize.” CFOs will need to lead the way on this debate.

Together at Last?
That said, there is broad consensus that cloud computing will save money. But Schuman adds that, while Intel has saved tens of millions of dollars, the prime motivation was not just about cost but also about flexibility and agility. Before the cloud, Schuman says, “an internal customer would come to us and say, ‘We need support for a new application.’ And it would take us three months to load the application on a server, test it, and then add security. That’s pretty horrible customer service. Now, with our private cloud, in some cases we can do it in less than three hours.”

That changes the very nature of the conversation between the CFO and the CIO: it’s no longer about the time and cost of loading the new application onto the server, but about the business utility of the application — its ability to deliver competitive advantage or a measurable return on investment.

If cloud computing can greatly reduce the complexity of implementing new computing services, the relationship between CFO and CIO becomes — at long last — centered on financial strategy. As Christopher Koch, associate vice president of research for the Information Technology Services Marketing Association, puts it, “Price is determined by complexity. Remove the complexity, and pricing becomes an issue of business performance. What are we really getting [in terms of business improvement]? Now [IT choices] are business decisions rather than technical decisions, such as factors like which application will integrate better with a legacy system.”

Schuman says there was a time when Intel “did a lot of IT for IT’s sake, or because it was interesting. Now we ask four questions for every key initiative: Will it increase employee productivity? Will it facilitate growth? Will it lower costs? Will it deliver service more efficiently to the company?”

CIOs and CFOs need to work through these questions together, because there is general agreement that in the cloud environment, IT investments can be made with a full understanding of the value they bring to the business. There is no magic formula for making that happen. But if it does, it may feel as if the spell cast over the CFO-CIO relationship has finally been broken.

David Rosenbaum is the former editor of CIO magazine, and writes frequently on business and technology.